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Why creditors and CRAs can report debts that were discharged in bankruptcy

August 5, 2016 Leave a comment

Last month’s post was about Bailey v. FNMA, and the question of whether a mortgage company can pull a credit report on a mortgage borrower, even after the borrower has discharged his mortgage in bankruptcy.  Soon after I wrote it, I heard from a lawyer in California who pointed out an issue that I hadn’t mentioned, namely, the law on when and why a debt can keep being reported, even though it has been discharged in bankruptcy.  With thanks to my correspondent for the inspiration (and for a couple of case cites that got me started), I will address that issue here.

The issue is:  Can creditors and consumer reporting agencies report a consumer’s pre-bankruptcy debts, even after those debts have been discharged in bankruptcy?  This is not a hypothetical question:  I was recently involved in a case that presented this issue (i.e., the defendant reported that a judgment against plaintiff was open and unsatisfied, and plaintiff contended that the reporting was inaccurate because the judgment had been discharged in bankruptcy).  What have the courts said about reporting debts that have been discharged?

My correspondent noted that in several bankruptcy cases, the bankruptcy courts have clarified that a bankruptcy discharge doesn’t wipe away the debt or reduce the balance to zero; the discharge merely enjoins the creditor from trying to make the discharged debtor pay it.  These bankruptcy courts have held that when a creditor continues to report a discharged debt as due and owing, the creditor is NOT attempting to collect the debt and is therefore NOT violating the discharge injunction.  See Small v. Univ. of KY, No. 08-52114, 2011 Bankr. LEXIS 1868, at *12 (E.D. Ky. Bankr. May 13, 2011); Vogt v. Dynamic Recovery Servs. (In re Vogt), 257 B.R. 65 (Bankr. D. Colo. 2000).

The Vogt court explained, helpfully, that:

It is apparent from the complaint in this case that the Plaintiffs believe that the effect of the order of discharge is to wipe away the debt. But that clearly is not the case … the discharge does not wipe away the debt. It only serves to eliminate the debtor’s personal responsibility to pay the debt.

The distinction is important, because the initial suggestion here is that the Defendant was somehow in error, or, perhaps, in violation of some provision of the Bankruptcy Code, when it continued to report that, in its records, the Dallas debt was still due and owing, notwithstanding the order of discharge in the Plaintiffs’ bankruptcy case. But the Court cannot fault the Defendant for taking this position.

In re Vogt, 257 B.R. at 70.

Federal district courts have recently made the same point.  In Abeyta v. Bank of Am., N.A., No. 15-cv-02320, 2016 U.S. Dist. LEXIS 43602, (D. Nev. Mar. 30, 2016), a plaintiff alleged that because she filed for bankruptcy in 2010, and was discharged in 2014, a number of creditors and CRAs violated the FCRA by reporting that she had had a “major delinquency” on her debts back in 2010.  The defendants moved to dismiss an amended complaint, and the court granted their motion, because:  a) “Plaintiff did not allege that the fact of the previous delinquency was untrue”; b) “bankruptcy does not prevent the reporting of debt”; and c) “the Bankruptcy Code prevents certain collection activities, but it does not alter the fact of delinquency.”  Id. at ** 5, 7-8; see also Riekki v. Bayview Fin. Loan Servicing, No. 2:15-CV-2427, 2016 U.S. Dist. LEXIS 99527 (D. Nev. July 28, 2016) (following Abeyta and granting motion to dismiss).

Long story short, “Bankruptcy does not prevent the reporting  of a previous debt. If the fact of the previous delinquency in this case is true, the FCRA explicitly declines to prohibit its reporting for at least seven years. The Court is unaware of any statute or case providing that discharge in bankruptcy makes a debt unreportable (as opposed to uncollectable) so long as only the fact of the previous delinquency is reported.”  Abeyta v. Bank of Am., N.A., No. 15-cv-02320, 2016 U.S. Dist. LEXIS 8918 (D. Nev. Jan. 25, 2016) (citation omitted) (granting motion to dismiss the original complaint; the motion to dismiss an amended complaint was discussed by the same court at 2016 U.S. Dist. LEXIS 43602, above).

 

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